Avoiding Common Student Loan Nightmares

There is no denying that college can be expensive these days. Stacked on top of the high price of tuition, there is the cost of books, supplies, housing, food, and more. Some students are fortunate enough to earn their way into the college of their dreams based on scholarships, either academic or from being the star athlete while in high school, or their musical or other talent that puts them a step above the rest. Others may come from a family of wealth that has no problem footing the bill for their children to attend the finest of universities. But for the great majority of college students, a student loan or other form of financial aid is necessary to continue their education beyond high school.

The average cost of tuition

…to attend a 4 year college today is $22,261 for a moderately priced in-state public college, and $43,289 for a private university. These figures explain why there is such a high need for student loans in the US today. According to American Student Assistance, a non-profit organization designed to help people find the right student loan, nearly 20 million Americans attend college each year and 60% of them have taken out student loans to get there.

The cost of higher education has risen sharply over the past few decades. For example, the cost of college tuition has shown a 498% increase since 1986 and the cost of textbooks has more than tripled over the past decade. In 1993, the average student had accumulated around $9,320 in student loan debt by the time graduation rolled around, whereas today it is now three times as much at $28,720.

Perhaps one of the most shocking statistics comes from the Consumer Finance Protection Bureau, which reports that Americans currently owe more than a trillion dollars on their student loans. This staggering figure illustrates how deep the problem has become throughout our nation, especially when you consider that the total US credit card debt is only $793.1 billion.

While student loans were originally created to help every child, whether rich or poor, live the American Dream and further their education, and thus their opportunity at success and happiness in life, they have become an uncontrollable and heavy burden to many. There are numerous horror stories about how student loan debt has destroyed people’s lives and how they are never able to fully get out from underneath it.

Some of the reasons for this negative light are the length of time it takes to repay the debt, the fact that the debt cannot be eliminated by filing bankruptcy, or the impact the loans have on a person’s overall credit worthiness or their ability to obtain other loans such as a home or car loan. Many lenders often include estimated cost of living expenses in the overall available loan amount, which prompts students to borrow more than they actually need, getting them further in debt before they even begin working towards their career.

The standard repayment schedule on a student loan is 120 months, or 10 years. This length of time can of course fluctuate, and if you are able to pay it off quicker, you will ultimately pay less in interest and feel a little less of that financial pinch. The problem is that only 52% of recent college graduates are able to find a job in their chosen field of study, leaving 48% still waiting tables, taking orders, and serving food at the local fast food chain despite their well-earned and quite expensive new college degree.

In fact, during 2011 53% of all Americans under the age of 25 with a Bachelor’s degree were either underemployed or unemployed altogether.

Student loan debt is unlike any other form of debt in the sense that it is one of the very few types of debt that cannot be included in bankruptcy. This means that with rare exception, the debt stays with you until it is either paid off in full or you die. Although there is no way to discharge the debt (unless there is a permanent disability or other uncommon circumstance), there are options to place the debt on hold for a period of time to allow you a chance to “catch your breath” and get to a more financially stable place in your life. These programs, known as deferment or forbearance, allow you to postpone your payments for up to one year without defaulting on your loan, and many times also keep the loan from accruing additional interest during the time period.

Like any other loan

…or line of credit, your student loans will show up on your credit report and can either positively or negatively influence your overall credit rating. Unlike credit card accounts which are classified as revolving credit, student loans are usually placed in the installment loan category, which is usually not given as much weight when it comes to impacting your overall credit score. However, any delinquency in your repayment frequency will show on your credit report which is viewed by lenders when it comes to potentially qualifying for other loans such as home loans, car loans, credit cards and more. It is also becoming more and more commonplace for employers to check a potential employee’s credit report before offering them employment. Because of these impacts on the bigger overall credit picture, it is important to keep up with your monthly payments and avoid delinquency with regard to your student loan debt.

The interest rate on student loans has been a topic of recent debate. On July 1, 2013, when a deadline passed and Congress had yet to reach an agreement on interest rates for student loans, the rate automatically doubled from 3.4% to 6.8%. This sent widespread concern and outcries from students and parents across the country who already felt the pressure of mounting student loan debt.

On July 24th the Senate finally joined the House of Representatives and passed new legislation that President Barack Obama is expected to sign into law sometime this week. This new law places different regulations on how student loan interest rates are calculated, implementing market-based interest rates which are calculated based upon the governments cost of borrowing and are capped to protect borrowers in the event of a severe spike in the interest rates.

This new law

…will reduce the interest rate on student loans to 3.86% for undergraduates, 5.4% for graduate students, and parents that take out loans for their children will borrow at a rate of 6.4% for the 2013-14 academic year. These rates would be essentially locked in for the entire school year, but are subject to increase the following year if the economy improves as it is predicted to pick up in the next couple of years. The interest rate would increase alongside the interest rates for government loans.

The new legislation offers some stability in the interest rates tacked on to student loans and also applies to all federal student loans, unlike previous rate adjustments which only applied to certain types of student loans. However, the rates are subject to vast fluctuation based on the economy and will likely see notable changes from school year to school year.

Some critics however, point out that the rate deal only fixes one thing – interest rates. It offers no solution in addressing the much larger issue surrounding higher education costs, especially when it comes to the ever mounting overall student debt figures which show our nation quickly headed toward a new debt crisis.

The bottom line

…is that when a student dreams about what their future career may be, they don’t often factor in the costs of obtaining the education needed to qualify for that job. And when it comes to getting a good paying job these days, it is usually standard that a college degree be obtained before you are even considered for the position. Due to the increasing costs of college tuition, student loans continue to be a critical step for many students in achieving their dreams.

The most important things to remember are to never borrow more than you actually need, try to avoid missing any payments on the loan, and always call the lender when you find yourself in a position where you are unable to make payments. Good communication with the lender can put you in a position to obtain a deferment for up to a year or more, thus preserving your credit score, keeping you on track to pay your loan off as quickly as possible, and able to enjoy your hard-earned new career that much faster.

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